11/09/2006 @ 6:00PM

NHL On The Rebound

If you bet that the National Hockey League would emerge from its 2004-2005 lockout with a reasonable cap on player salaries and significant revenue sharing payments from rich to poor teams and that fans would quickly forgive the league and return to the turnstiles, you won big. In 2005, Henry Samueli and his wife Susan, who already controlled Southern Californias Honda Center, snapped up the Anaheim Ducks for $70 million, just $20 million more than
The Walt Disney Co.
paid for the expansion team in 1992. The Ducks are now valued at $157 million.

The Atlanta Spirit investment partnership purchased 85% of the Atlanta Thrashers, the Atlanta Hawks of the NBA and the operating rights to state of the art Philips Arena for $250 million in 2004. The Thrashers alone are now worth $128 million. And then theres former Wall Street executive Jeffrey Vanderbeek, who paid $125 million for the New Jersey Devils in 2004. With a new arena on the horizon in Newark, the value of the Devils has increased to $148 million.

Hockey teams are worth more today than before the new collective bargaining agreement (CBA) because player salaries have gone down to 54% of league revenue from 66%. Fixed player costs bring greater certainty to the bottom line, which in turn means buyers will pay a higher multiple of revenue to acquire a franchise. The average hockey team is now worth $180 million and makes an operating profit (in the sense of earnings before interest, taxes, depreciation and amortization) of $4.2 million. During the 2003-2004 season, the last before the lockout, the average hockey team was worth $163 million and lost $3.2 million.

Without question, the biggest beneficiaries of the new CBA are small-market teams. Last season, 11 low-revenue NHL teams received more than $90 million in revenue-sharing payments (the proceeds came from the ten teams with the highest revenue and from a portion of playoff gate receipts), with the New York Rangers and Toronto Maple Leafs chipping in $10 million each. The only reason why the Buffalo Sabres, Pittsburgh Penguins, San Jose Sharks and Washington Capitals posted profits last season was because of the money they received from revenue-sharing.

Just how important is revenue-sharing to a small-market franchise? Consider that
Research in Motion
Chairman
James
Balsillie
James Balsillie
is looking to pay $175 million to buy the Penguins from Mario Lemieux even though the team has the second most onerous arena situation in the NHL (the Islanders have the worst). Yes, part of that $175 million is a premium tied to the hope that Balsillie will eventually get a new arena in Pittsburgh or another city. But a salary cap and revenue-sharing puts a floor on Balsillies risk.

Ironically, the New York Rangers, owned by $5.6 billion (latest 12-month sales)
Cablevision Systems
, have also benefited from the salary cap. For years, the team signed fading stars to extravagant contracts (think concussion-prone center Eric Lindros) and failed to make the playoffs. Last season, forced to rethink their spendthrift ways, the team was younger, faster and hungrier, making the playoffs for the first time since 1997. And despite being a big contributor to the leagues revenue-sharing, the Rangers posted a profit of $17.7 million thanks to a $30 million drop in payroll.

Another benefit of the salary cap is the ability some team owners have to leverage their arena. Earlier this year, George Gillett, who bought the Montreal Canadiens and the Bell Centre for $181 million in 2001, borrowed $240 million (most of which was secured by the arena). The financing allowed Gillett to pay himself a $72 million dividend.

But it is not all sunny days for the NHL and commissioner Gary Bettman. The leagues national TV deal with Comcast‘s
Versus network nets each team only $2 million a year. The contract with General Electric‘s
NBC is even worse. The deal calls for NBC and the NHL to share ad revenues after NBC covers production costs, and last season, money to the NHL was negligible from the deal.

Compare that to the NFL, where 32 teams will divvy up $3.5 billion this year from TV. Baseball and NBA teams net $30 million apiece from their broadcast deals (NHL teams received $5.8 million, including Canadian TV and pay-per-view last season). The problem? Nobody watches hockey on TV. Regular season games drew a 0.2 rating on Versus (formerly OLN). Games on NBC had a 1.0 rating. Bowlings TV ratings leave hockey in the dust.

The NHL also needs to do something to goose revenues to pay for long-term guaranteed contracts like the 15-year, $67.5 million deal the New York Islanders doled out to goaltender Rick DiPietro in September. Owners wont be able to generate much more revenue growth from building new arenas because only seven teams play in buildings that are more than 15 years old. One cause for hope: Growth in the Internet and multimedia platforms.

The CBA also needs to be addressed. The transfer of revenue from the have to the have-not franchises is healthy for the league as a whole, but there are several inequalities. The low-revenue Nashville Predators got the biggest check last year ($10 million) despite having the most favorable lease in the NHL. The team gets to keep nonhockey revenue in their taxpayer financed building, and the county partially covers arena operating deficits. Meanwhile, the Islanders, who are stuck with the worst arena situation in hockey, got nothing from revenue sharing. Why? Teams in the New York, Los Angeles and Chicago markets arent eligible to receive any money. So the Islanders revenues came in $5 million lower than any other team.

The NHL still has some work left to do to get its financial house in order, but it is in much better shape than two years ago, when 30 arenas sat dark during a lost season.